Can Sportsbook Tax Hikes Help States Fight Problem Gambling

It seems states have hit a significant roadblock in the fight to curb problem gambling.

Over the last year, we have seen several states consider bills to drastically restrict their legal sports betting markets. However, those efforts have either failed or had their most significant proposals stripped away over financial concerns. This has led to some smaller new regulations, but they fall short of the solution needed to address the growing problem of gambling. 

While many states continue to push for regulatory changes, there is reason to wonder whether tax reform could offer a far easier path.

Learnings From Illinois Tax Reform

Over the last two years, Illinois has drastically reformed its sports betting tax structure. It initially moved to a graduated scale, where a sportsbook’s tax rate is determined by its net gaming revenue. One year later, the state added a controversial “per-wager” fee, which required operators to pay between $0.25 and $0.50 per bet they processed.

Sportsbooks were furious over the increased costs, which they passed on to bettors through fees and higher minimum-bet requirements. This priced many bettors out and drove many away, leading to a significant drop in the state’s handle. However, bettors who remained spent more, keeping sportsbooks' revenue and the state's strong. 

These results have led other states to begin discussing similar tax reform, though none have passed legislation to do so.

Can Higher Costs Slow Problem Gambling?

While problem gambling is often associated with massive losses, that doesn’t mean those bettors are placing large wagers.

There are a large number of US bettors who place cheap wagers on longshots and parlays that offer massive payouts. The idea of placing a $1 parlay for a chance to win $100 may seem harmless, but those wagers rarely pay off. Instead, bettors end up spending far more than they planned as the convenience and low cost of wagering keeps them engaged.

This group of bettors has been largely priced out of the Illinois sports betting market, accounting for the drop in handle over the last year. 

While bettors struggling with addiction will pay higher costs to gamble, new and younger bettors may not. That can help prevent them from developing problem gambling habits, preventing their lives from being altered by the long-term consequences that often follow. 

What About Prediction Markets?

The results from Illinois provide some hope for responsible gambling advocates, but it may be too soon to know the true impact the state’s tax reform has had. One of the biggest questions remaining is where the bettors exiting the state’s regulated sports betting market are going. 

The biggest fear is that many of those residents are switching to sports prediction markets. These platforms aren’t considered gambling under US law, making them exempt from state laws and industry taxes. As a result, they have lower operating costs in Illinois and other states with high sportsbook tax rates.

If bettors have simply replaced regulated sports betting with prediction markets, this could lead to a spike in problem gambling. The emerging industry has largely ignored the problem, offering fewer resources for struggling bettors. 

While Illinois and other states have passed bills to tax prediction operators, they’ll need to win a legal fight against the industry to enforce them. Until that happens, states raising costs will risk driving bettors into a riskier market.